The visible hand in economics

De-regulate health care?

Posted on: September 24, 2007

I generally enjoy The Economist’s blog, but I think they’ve taken their free-market philosophy a little far with their post on the “de facto monopoly of the American Medical Association in the distribution of licences to practice medicine.” Their claim is that the AMA extracts large rents from their monopoly and unfairly prevents other from practicing medicine. I don’t know what sort of rents doctors get from their education so I can’t comment on that. A more interesting question is whether it would be efficient to allow a deregulated market in medical practice.

Every time you go to the doctor you are, effectively, contracting for medical services. A well-known problem in contracting theory is lack of verifiability. The problem is that it is very costly to you to find out whether the doctor is providing you with high quality medical services. If you are not yourself trained as a doctor then you have to seek the opinion of someone who is in order to verify the quality of service you received. Even then, there is a question mark over the third party’s credibility: they may want to either protect the reputation of medical practitioners or, alternatively, destroy the reputation of competitors. Even the knowledge that you recovered from illness is not enough since this is a very noisy signal of medical quality. Without specialist knowledge it is impossible to know what the outcome would have been in the absence of treatment. The suggestion that consumers ought to have “choices over traditions of training and styles of care” suffers from the same problem. In the absence of highly specialised knowledge there is no way for consumers to verify the quality of each style of care.

There are two possible remedies to the problem of verifiability: information and regulation. Consumers can be informed by the AMA about the choices they face in a deregulated market or the market can be regulated. Unfortunately, it is simply not possible to become an expert on medical care by reading a couple of pamphlets. Placing the burden on consumers to choose wisely is unlikely to result in an efficient health care outcome. By contrast, regulation puts the burden of choice on experts in the field for whom it is far less costly to evaluate performance. It is quite possible that the rents that the AMA extracts from consumers are far lower than the costs to society of deregulation.

1 Response to "De-regulate health care?"

You can make the claim about any monopoly that even though it extracts rents, it is still more efficient than the alternative (isn’t that the definition of a natural monopoly?) But people tend be (justifiably in my opinion) skeptical. I’m unclear why you think medical accreditation is special.

For most occupations with accreditation standards, I’m dubious that practitioners can’t establish reputations in the normal way. In fact, I suspect that many have to anyhow – even if you have your medical practitioners’ certificate or whatever, most of your reputation building will be an ongoing practice based on satisfying your customers.

I do not think that the market for doctors would break down altogether as long as there are still laws protecting you from false claims (e.g. nurses actually pretending to be doctors). If your organization considers that your accreditation is a valuable signal to potential customers, why should you be worried about competitors who have to go without your accreditation (as long as customers can distinguish between accredited and unaccredited)?

The use of cheaper medical technicians to reduce the use of more qualified doctors, as described in the Economist post, probably is the future of medicine. It just seems silly to have extremely qualified and hence expensive doctors seeing every patient instead of utilizing more of a triage system.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Add to Google
%d bloggers like this: